Managing the Regulatory Thicket: Cumulative Burdens of State and Local Regulation

Imagine an elderly widow who lives alone in a rough part of town. She worries about her apartment being broken into while she sleeps, so she adds a deadbolt and a security chain to her front door. Next, she adds another deadbolt, and a rotating security latch, like they have in hotels. Unsatisfied, she adds a metal bar that slides across the entire door. Then, still paranoid, she installs yet another deadbolt, and another, and another. She continues installing more, and still heavier, locks to the point that it takes her nearly 5 minutes to open the door whenever she needs to go somewhere.

Of course, a strong case can be made for each device individually. But together this assortment of locks renders her door practically useless. In fact, these “security” features may present an even greater (unintended) hazard than the risk they were meant to address. Unfortunately, this is what government regulation looks like in 21^st Century America. In this report, we express concern that America’s regulatory environment has become just like that door — an agglomeration of individually defensible security measures that, in the aggregate, pose a real risk of undermining their very reason for being.¹ We call this the “regulatory thicket,” and it may be the single greatest threat to innovation and entrepreneurship in America today.

We first provide a practical description and overview of the regulatory thicket by walking the reader through some of the most common types of regulations that entrepreneurs must navigate before they can create or expand a business, and showing why unchecked regulation inevitably benefits large, established businesses at the expense of small, innovative startups. We then put a human face on the problem by describing the experiences of entrepreneurs who have become entangled in the regulatory thicket and how they tried to fight their way through (Part I). Next, we summarize the economic literature regarding the costs of runaway regulation generally and then in the context of specific regulatory settings (Part II). We also consider the non-economic costs of runaway regulation and its effect on key institutional commitments like the rule of law (Part III). Finally, we offer some ideas for trimming back the thicket and helping to ensure that if it grows or changes, it does so by design and not by happenstance (Part IV).

A.    Overview: A Closer Look at the Elements of the Thicket

Dan’s Hamburgers, Amy’s Ice Cream, and Wild Jimmy’s Sausage and Beef Jerky are three food-centric small businesses in the South with one remarkable fact in common. These budding entrepreneurs all agree about one thing: if they knew before what they’ve learned through hard experience, they never would have started or expanded their businesses. “If I would’ve known, I never would have done it at all,” said Jimmy. “I will never build from the ground up again,” said the owner of Amy’s Ice Cream. “Never, Never, Never” echoed the owner of Dan’s Hamburgers. And such complaints are hardly limited to the food industry. Whether it’s Kathy Faia trying to start a family-owned remodeling business in Louisiana, or Adam Jackson trying to leverage his former military experience to start a security company in Tennessee — wherever they are and whatever they do, up-and-coming entrepreneurs in pursuit of the American dream often voice the same complaint.

So what is taming Wild Jimmy’s and melting Amy’s Ice Cream’s small business enthusiasm? In a word: regulation. But it’s not any one particular government regulation. Rather, small companies everywhere are complaining about the problem powerfully illustrated by Wild Jimmy’s owner and founder when he produced a hefty binder full of paperwork required by myriad governmental entities. “We had to get so many licenses, certifications and inspections,” complained Jimmy. “There are so many hoops to jump through.”

Starting and growing a small business can be daunting for many reasons. In the hope of achieving a lifelong dream, entrepreneurs usually take a major financial risk. For many that means walking away from secure employment in exchange for the possibility of profits in the future, inevitably coupled with a real chance of calamity for themselves and their families. Many small business owners invest their life savings in launching a business, or they take personal lines of credit — charging business expenses on personal credit cards, taking out a second mortgage on their home, securing loans from friends and family, or working with a bank. Small business owners are willing to take such risks because they believe they have the skills, the vision, and the drive necessary to succeed. Not all will succeed, but they do so often enough that small businesses form the backbone of the American economy, even today.

Unfortunately, success in business increasingly has less to do with commercial acumen and more to do with the ability and willingness to cut through thick layers of bureaucratic red tape. Today, regardless of what industry they’re in, small business owners must not only manage the day-to-day functions of their business, but also navigate the increasingly treacherous waters of federal, state, and local regulation.

When asked, business owners consistently list “taxes” and “government regulations and red tape” as their biggest problems. It is difficult for a company to build its reputation and customer base from scratch and to compete with established businesses, but entrepreneurs expect fierce competition. New business owners are far more surprised and frustrated to find the tangle of regulatory issues that they must continually work through when launching and growing their business. Together, federal, state, and local regulations impose an estimated $8 trillion in costs annually. Not surprisingly, research shows that new regulatory impositions result in a decrease in new business start-ups, a slowdown in hiring, and even business closures.

Regulatory burdens tend to hurt upstart and small businesses in particular because they cannot absorb the costs or adopt new expensive processes or technologies as easily as larger companies.² While larger corporations have in-house attorneys and ample budget for outside counsel when seeking expert guidance on complex regulatory issues, small businesses do not have that luxury.³ Small businesses rarely have the resources to hire a human resources or regulatory affairs manager.⁴ As a result, entrepreneurs are often drawn away from productive tasks that could be growing their business — instead spending inordinate time and energy trying to understand regulatory requirements affecting their day-to-day functions. Meanwhile bigger companies have a comparative advantage when trying to comply.⁵ In fact, larger companies are more likely to favor new regulatory impositions precisely because they impose disproportionate burdens on smaller competitors and present barriers to entry for new market entrants.⁶ Thus, regulation reduces the number of new business start-ups.

Federal regulatory requirements can be difficult enough for small business owners to navigate, but state and local regulations make matters even worse.⁷ State requirements are often more numerous and more demanding than at the federal level — imposing even more complicated or stringent requirements than analogous federal regimes or regulating matters not regulated by Congress. Local authorities often choose to go even further — even in those states notorious for imposing the most controversial and heavy-handed regulatory standards. Together these intertwined federal, state and local regulatory requirements present a formidable regulatory thicket. And every year the state and local regulatory thicket grows thicker. This is a cause of great concern, not just for the small businesses directly affected, but for everyone. To be sure, nobody benefits when potential start-ups are discouraged from taking the field.

By its very nature, “death by a thousand cuts” is a challenging concept to describe and diagnose with precision. Since no individual “cut” — or even some subset of “cuts” — is the specific and direct cause of death, explaining a complex problem like the regulatory thicket is not amenable to anything like mathematical certainty. It is especially difficult to demonstrate how the various individual parts of a problem like the regulatory thicket may interact in complex ways that make the phenomenon not so much additive as multiplicative. The problem of describing the thicket’s interaction and agglomeration is a significant one, and it is possible that we lack the tools to describe it with analytic precision.

Recognizing our inability to comprehensively describe every regulation affecting every small business in America, much less convey the myriad ways that individual regulations may interact to compound the problem, this paper provides a synopsis of the variety of regulations that small businesses encounters every day in every state. Even incomplete, and without any attempt to illustrate the interaction between regulations, the pile of regulations is daunting. It is no surprise that small business owners regularly exclaim: “Never, Never, Never” again

i. Licensing Requirements

Red tape usually begins to descend on a business long before it ever opens. Even before opening day, many would-be entrepreneurs must first jump through extensive hoops — including years of training requirements, exams, costly fees and other requirements — to become licensed to work within their chosen occupation. As detailed in a separate paper, these licensing requirements not only present barriers to entry for those seeking to launch a business, but also deter otherwise competent individuals who want to engage in the workforce.

Typically, a worker will gain experience, and greater expertise, working under the supervision of someone else before launching an independent business. But in most jurisdictions, the first step in launching a business is to seek permission from the state and/or local authorities. In addition to obtaining a general business license, a would-be entrepreneur must figure out whether the specific business model requires a special license.⁸ Municipal licensing requirements can be particularly burdensome, because a single business may have to seek license from multiple localities. And further licenses may be required in the future if a business intends to grow or offer new services.⁹ What is more, to remain compliant a business may have to reapply year after year. With each year, of course, the amount of time and money invested in the business increases, as does the harm that would result from failing to obtain re-licensing.¹⁰

Setting aside the paperwork burden, licensing fees can be costly. In addition to initial licensing fees, some jurisdictions require ongoing annual “fees” or “special taxes” simply as a condition of allowing a business to operate. For example, in Nevada, all businesses pay a business license fee each year — $500 for corporations and $200 for pass-throughs. The Colorado Secretary of State imposes controversial business licensing “fees” designed to cover not only the cost of services provided to the business community but all functions of the Secretary of State’s Office, including administering statewide elections.¹¹ And the 10 percent “technology fee” paid by businesses in the District of Columbia goes to plug holes in the city’s budget, even though city law states that the funds are to be used to upgrade the licensing system.¹²

For some industries, states limit the availability of required licenses — charging heightened fees to obtain a coveted license. Sometimes already-established businesses lobby for the government to impose or maintain a cap on business licenses within their industry. For example, the Montana Legislature recently considered whether to expand the cap on available liquor licenses. But existing license holders protested vigorously and were ultimately successful in their opposition to reform. And to further discourage would-be entrepreneurs, Montana charges as much as $340,000 for a liquor license to operate in a small town.

Worse, one might be required to purchase multiple licenses for a business, perhaps even with conflicting requirements.¹³ In 1995, Rich Pelletier looked at an old farmhouse for sale in Nashoba Valley, Massachusetts. He ended up buying the whole property, including an orchard and winery, even though he had never farmed or run an orchard before. His background was in culinary arts, so he decided to turn the farmhouse into a restaurant that would support the orchard and winery with the hope of turning a failing property into a successful business. He was required to get four licenses: one for pouring alcohol and three for running the orchard and winery. Even under this regime, Rich successfully built the business and ran it for years — even adding a brewery to the property, and inventing an apple-based vodka after noticing how many apples from his orchard went to waste. But that all changed when the Massachusetts ABC told him he would no longer be able to renew all four licenses due to an obscure state law that prohibits owning both a pouring license and a farmer’s manufacturing license. To continue operating, he’d have to shelve a major portion of his operations. And Rich is not alone; there are similar stories of business licensing requirements smothering innovative business models

ii. Regulatory Hurdles in Opening Your Doors

Beyond business licenses, entrepreneurs face the basic question of whether the law will allow them to carry out their desired business operations within a given locality or at a chosen worksite. Take zoning regulations: a new business owner must often consult legal counsel to get guidance on whether an elaborate and complex zoning code will even allow the entry of a new business. That prospective business owner may need to act quickly to take advantage of available property, but he risks finding out later that existing land-use restrictions forbid commercial activity or that the restrictions forbid the sort of enterprise he envisions. An entrepreneur may also learn that existing restrictions prohibit the owner from making changes that may improve the functionality of the property or that may be more appealing to customers. Such restrictions may force an entrepreneur to look elsewhere for a more workable business site, or to make changes to their business operations to ensure conformity with zoning restrictions.¹⁴

In many instances the entrepreneur must pursue a special permit to begin business operations, which may result in significant (or indefinite) delays.¹⁵ Local officials usually have tremendous discretion to allow or disallow a new business from starting or expanding. Further, zoning codes in many cities prohibit home-based businesses; zoning administrators are often unwilling to grant variances to allow for exceptions, thereby discouraging would-be entrepreneurs who cannot afford to take-out a commercial lease elsewhere.¹⁶ Complicating matters, businesses must often seek separate approvals from different state and local agencies, which may impose inconsistent requirements or that otherwise cause extended delays. And in many cases the permitting process can be costly. Not only must the applicant pay substantial fees to state and local authorities, but often he or she also must pay for professional assistance from consulting firms and or legal counsel to navigate complex regulatory regimes. Those costs are compounded if land use authorities require redesign after redesign, as is common when bureaucrats enjoy significant discretion to withhold approval.¹⁷

In some jurisdictions, entrepreneurs face special challenges because the local zoning code requires a business to secure the premises on which it intends to operate before it can submit a permit application. While such a requirement may not prove especially cumbersome for a major corporation, it can be cost-prohibitive for small businesses with limited capital. Such a requirement forces a business either to invest heavily in a property or to commit to a lease (usually long-term) without knowing definitively that it can carry out business as planned. In the best-case scenario, a business in this position will be forced to make mortgage or rent payments without earning income from the property until it obtains permit approval. Any delay in processing the application will cost the business money in terms of lost potential revenue, which may very well topple a business before it ever gets off the ground.¹⁸

The City of Sacramento, California, imposed so much administrative red tape of this kind that one entrepreneurial couple gave up their dream of opening a West Coast microbrewery. The couple was told that they would need to get approval for the brewery from the city’s zoning committee, but that the committee would not even consider their plans until after the two bought or leased the property, submitted architectural designs, and paid a $15,000 fee. Even after they met these conditions, the budding entrepreneurs would have to wait indefinitely for a decision. They were told the typical waiting time was 8-12 months, but that they could pay more money for an expedited assessment, wherein planning department staff would give a preliminary (unofficial) judgment as to whether their plans were likely to be approved or not. They decided instead to uproot and start the Fort Myers Brewing Company in Lee County, Florida, where local officials were far more open to “new and innovative business.”¹⁹

Specific building code requirements may also complicate necessary remodeling projects for a business looking to open its doors or expand an existing facility.²⁰ In many cases, alterations are required by law under the Americans with Disabilities Act, which requires modifications to older buildings to remove “barriers to access” to the disabled community. While the ADA may be well intentioned, it has proven costly for businesses. In addition to ensuring compliance with U.S. Department of Justice guidance on what changes are required under federal law, small business owners must also ensure compliance with state regulations that may require more exacting standards.²¹ The federal guidance alone is over 80 pages, often requiring changes as minute as the precise placement of toilet paper rolls in bathrooms.²² If placed a quarter-inch too low or too high, the business may be in violation. Because state-imposed standards are piled on top of the federal requirements, ADA compliance is so difficult in California that a cottage industry has developed to help business owners spot and make necessary changes.²³

What is more, California has incentivized plaintiffs to sue small businesses by authorizing automatic damages of $4,000 for each violation found on-site, and by stacking damages for every time the plaintiff visits the business in question.²⁴ This has made ADA litigation in California a veritable goldmine for enterprising plaintiffs. Small businesses operating in older buildings make for easy targets because, unless a business has paid for a thorough inspection from a certified access specialist, it is difficult to know whether they are 100 percent compliant. Moreover, the law provides no right for a business to pursue corrective action once the violation is brought to light. For this reason, some businesses have simply closed shop once hit with a state ADA lawsuit because they cannot afford to pay both penalties and attorney’s fees. For example, a popular billiards hall that had been open for 50 years was forced to close when the owner was sued by a serial state ADA filer.

Disability access laws not only affect business ventures, but also discourage charities seeking to provide needed public services. For example, Mother Teresa’s Missionaries of Charity ran into problems in New York City when they sought to convert two vacant buildings into a homeless shelter, because the City demanded that they install an elevator, which would have cost up to $150,000. In their view an elevator was a luxury that they could not afford. “The sisters felt they could use the money much more usefully for soup and sandwiches,” said Msgr. Henry Mansell, then-chancellor of the Archdiocese of New York. The nuns had already purchased the buildings for use as transitional housing for 64 men when they learned about the requirement to install an elevator. By that time, they had spent approximately $100,000 to repair fire damage. “Confronted with the unanticipated expenses and delays, the nuns decided to abandon the Bronx project,” the New York Times reported.

iii. Regulation of Sales

Once up and running, businesses must navigate all sorts of rules at the state and local level to ensure compliance with various consumer protection statutes, ordinances, and other mandates. Consumer protection laws serve a valid public function insofar as they may deter fraudulent or misleading conduct; however, in creating open-ended causes of action — even in the absence of any real injury — state and local consumer protection laws often invite lawsuits over ostensibly reasonable conduct. For example, a small business in New Jersey was recently threatened with a lawsuit because it was selling products to consumers in the District of Columbia and (truthfully) comparing its listed prices with the manufacturers’ recommended sales price. The owner had no idea that this practice might violate consumer protection laws²⁵ until hit with a letter from an attorney, which threatened a lawsuit and demanded money to make the problem go away.

Likewise, product labeling laws can provide consumers with potentially helpful information, but they inevitably create regulatory burdens and potentially open companies up to lawsuits for inadvertent mistakes. California’s Proposition 65 is a prime example. Proposition 65 requires businesses to warn consumers if they are using chemicals that are “known to the State of California” to cause cancer or reproductive harm. Since 1986, California’s list has grown from fewer than 100 to over 900 chemicals, and it continues to grow each year. The list includes many naturally occurring chemicals and requires warnings for products (including food) deemed entirely safe by the U.S. Environmental Protection Agency or the U.S. Food and Drug Administration.²⁶ These labels often appear on products sold throughout the country. Theoretically, a company manufacturing products that may be sold in California can create special warnings for California consumers; however, in practice it is often more costly to produce separate labels for California and the rest of the country.

Proposition 65 also invites lawsuits because it provides successful plaintiffs with attorneys’ fees. Even where there is little evidence that a product causes any harm, plaintiffs can bring a class action suit that often results in a large settlement, because these suits are so costly to defend. And while Starbucks may have the resources to defend against a Proposition 65 lawsuit for failing to provide warnings on coffee, a smaller coffee shop will likely go bankrupt fighting this sort of lawsuit. For this reason, most businesses post Proposition 65 warnings in an abundance of caution even where it is unclear whether a warning is necessary. As a result, Proposition 65 warnings are ubiquitous — appearing on products as innocuous as potato chips, Christmas lights, and even grilled chicken.

California is not alone. There has been a proliferation of disclosure requirements across industries and throughout the United States — from mandated disclosures related to mortgages, pharmaceutical drugs, and genetically modified foods to requirements to list calorie counts at fast food establishments. These requirements often have the effect of driving up the cost of doing business, while unnecessarily stigmatizing products. In one example, the state of Florida nearly forced a small dairy out of business by enforcing a rule that prohibited it from labeling its product as skim milk. Florida law prohibited the company from labeling its milk as “skim” because it was not including supplemental vitamins. It was told that it needed to label its product as “Imitation Skim Milk.”

State and local law complicate business transactions in many other ways. For example, New York prohibits merchants from imposing surcharges on credit card transactions. Wisconsin prohibits businesses from including automatic renewal provisions within commercial contracts. Meanwhile, businesses in California have been hit with lawsuits for alleged discrimination in pricing between men and women. For example, night clubs have been sued for letting women in for free on “girls nights.” Opportunistic lawyers have begun suing minority-owned hair salons and dry cleaners for charging different prices — notwithstanding the fact that a man’s haircut or shirt is generally less complicated to cut or clean than a woman’s. There are innumerable other examples.²⁷

The latest trend in state and local regulation is a move to require out-of-state merchants to collect and remit sales tax for products sold online. This is especially problematic for businesses based in states like New Hampshire, Delaware, Montana, or Oregon that are not currently required to collect sales tax for in-state sales. Different jurisdictions may impose different rules for collection and remission of sales taxes. Compliance becomes exponentially more complicated for small businesses where municipalities impose their own requirements on top of (or in lieu of) state requirements. Though software is available to ensure compliance with inconsistent requirements across the country, it is expensive; this leaves smaller vendors in a bind.

iv. Navigating Labor and Employment Issues

Some of the most vexing regulatory issues come up as a business seeks to grow by expanding its workforce. Labor and employment standards are difficult enough for small employers to navigate. While federal standards are the default in many jurisdictions, some states impose more burdensome and nuanced rules. As companies add employees, new and often more complex regulations kick in, which can be especially problematic for companies still too small to bring on a full-time human resource specialist. Small employers must therefore devote inordinate time and energy in resolving HR questions that arise every day.

Compliance is especially difficult for small businesses when the legal landscape is perpetually changing. Consider California, where the state legislature and agencies are constantly changing regulatory standards. To make matters worse, California authorizes private lawsuits for virtually every regulatory infraction, even innocuous mistakes like inadvertently failing to include one of nine required items on an employee’s paystub. Lawsuits over even minor infractions are easy to initiate and can sink a business. The employer often bears a difficult burden of proving innocence when accused of wrongdoing.

Employment law is complicated further by a growing trend toward municipal regulation. For example, numerous cities and counties have enacted ordinances raising minimum wage, mandating paid sick leave requirements, and imposing other rules. Balkanization of labor and employment standards is especially cumbersome for a business with a mobile workforce. A plumbing company may send out employees to service homes throughout the region and may have to deal with conflicting and inconsistent requirements from one locality to the next. Because it is impractical for a company to pay different minimum wages for the time a technician spends on projects in one city next to another, dominant cities tend to dictate employment standards for the entire region — often to the consternation of bedroom communities and state lawmakers.²⁸

One of the first issues that comes up when engaging the services of another is whether the laborer is properly classified as an employee or an independent contractor. In many cases this is a difficult question. That is especially true where state agencies utilize different tests for distinguishing between contractors and employees. As a result, it is easy to misclassify an independent contractor as an employee. But these mistakes can bankrupt a business quickly. For this reason, many companies err on the side of treating contractors as employees to avoid the risk of lawsuits. Meanwhile, some jurisdictions impose demanding tests that effectively eliminate innovative business models that rely on independent contractors. For example, the California Supreme Court’s recent decision in Dynamex v. Superior Court²⁹ came as a shock to many businesses — especially in the gig economy. The Dynamex court ruled that businesses cannot use independent contractors if those contractors are providing the same sort of services that the company offers to the public. Not only does this mean that many companies must reclassify workers as employees, but it affirmatively discourages larger companies from outsourcing work to start-ups who are building their business.

Critically, classifying a worker as an employee comes with a big ball of red tape. Employers must pay unemployment insurance, provide workers’ compensation coverage, and offer many other benefits that state and local law require. Employers must also determine whether they can pay a salary, or whether they need to pay based on the hours worked. And if the worker is hourly (and sometimes even if salaried), they must make sure they pay the required minimum wage for all hours worked.³⁰ While often well-meaning, these requirements can dramatically increase the administrative cost of doing business.³¹

Many jurisdictions (state and local) are moving to raise minimum wage.³² California is especially complicated because there is currently an escalating two-tiered wage rate for businesses of different sizes at the state level — with even more demanding municipal requirements. These requirements in turn trigger heightened salary mandates for exempt employees.³³ Meanwhile, California and other states impose more stringent overtime requirements. For example, Pennsylvania has proposed regulations to dramatically change overtime rules so as to require companies to pay an hourly rate and overtime unless an employee is paid an annual salary of at least $47,892 — more than double what is required by federal law. Pennsylvania’s proposed regulations also change the rules for determining whether an employee performs the right “duties” to be paid as an exempt salaried employee.³⁴

Paid sick leave requirements impose further complications for employers, who must effectively pay a defined wage for time an employee is out and unavailable to work.³⁵ This is just another well-intentioned policy at the state level that imposes serious difficulties for employers. For example, some jurisdictions have moved to impose “predictive scheduling” requirements that are intended to benefit workers, but which make it all the more difficult for managers to provide flexibility for employees who may request changes in their schedules.

The so-called “ban the box” movement is another example of burdensome, if well-meaning, regulations. To help individuals with a criminal background reenter the workforce, these rules prohibit employers from inquiring about criminal history until after extending an offer. While employers are allowed to rescind an offer upon learning about a past conviction that may call into question an applicant’s capacity to do the job in question, these jurisdictions often make it procedurally difficult to withdraw an offer — even where there is good reason. For example, California requires employers to (1) provide a copy of the criminal background report; (2) inform the applicant of his or her right to provide supplemental information or explanation; (3) wait up to 10 days before finalizing the decision; (4) give written notice of the final decision, along with information about how the applicant may request reconsideration; and (5) provide a notice that the applicant has a right to file a discrimination complaint with the California Department of Fair Employment & Housing.

Employers face multiple regulatory regimes simply in managing the workplace on a day-to-day basis. For example, employers must provide numerous “notices” to employees on their rights. They must also comply with document retention rules that may differ from federal law. It is easy for employers to make mistakes with meal and rest break requirements, and even easier for aggrieved employees to make wrongful accusations that they were denied breaks. In some jurisdictions, employers must provide mandatory training to supervisors on harassment issues. Likewise, employers must make difficult decisions every day in managing employees, not only to avoid the risk of harassment claims, but also in dealing with more mundane matters like scheduling. For that matter, dealing with leave issues and requests for accommodations is one of the most complicated areas of the law involving layers of regulation at the federal, state, and local level. Expanded medical leave laws and state disability laws can be especially vexing for an employer to sort out without assistance from an HR professional or an employment law attorney.

Disciplinary and performance issues also come up frequently. But employers are often afraid to terminate insubordinate or underperforming employees, even where they are costing the company money, creating work for others, and hurting morale. Small employers fear wrongful termination lawsuits because it is easy to make an allegation of discrimination or retaliation, but often cost-prohibitive to mount a serious defense. Further, there is always a risk, even when terminating an employee for legitimate reasons, that the employee may file a complaint about other technical violations.³⁶

v. Industry Specific Regulation

Every industry has its own — sometimes very technical — regulatory issues. While regulation is often justified as a necessary exercise of state power to protect public health and safety, the reality is that these regulations are sometimes hyper-technical and counter-productive, especially in aggregate. Worse, in some cases regulation is co-opted by established industry insiders to stifle competitors or to otherwise benefit incumbent businesses. The following are a few examples:

          a. Ranching, Farming, and Silviculture Regulation

Businesses in the agricultural industry often feel the pain of environmental regulation first-hand. In California, for example, farmers are currently struggling with requirements to keep their trucks and vital machinery compliant with ever more stringent emission standards from the California Air Resources Board. Increasingly, they are told how and under what conditions they may plant and harvest crops, and/or what conditions they must abide by in raising livestock.³⁷

One of the most frustrating issues for businesses in these industries are restrictions on how they may use their own lands.³⁸ State law often imposes more stringent environmental regulatory standards on private property than are imposed under federal law.³⁹ For example, an area that is otherwise exempt or excluded from regulation under the federal Clean Water Act or the Endangered Species Act may very well be subject to state level restrictions if it is deemed to be “ecologically sensitive.”⁴⁰ And as federal regulators seek to deregulate in areas, state regulators are often eager to double down by imposing their own, more restrictive, rules.

          b. Food Industry Regulation

Food production is already heavily regulated at the federal level. But while U.S. Food and Drug Administration regulation is supposed to guarantee uniform standards for health and safety, state laws often impose further regulatory burdens throughout the chain of commerce — from “farm to fork.” Added state regulation can effectively snuff out cottage-industry food companies, or companies with unique business models. For example, Wisconsin law requires official taste testers to assign a letter grade to butter before it may be sold in-state. The grade is essentially a government mandated taste test that assesses whether the state considers the butter “pleasing.”⁴¹ But this regulatory requirement has proven a major problem for small out-of-state producers that cannot afford to have each batch independently graded and separately labeled.

Matthew Secich’s story is illustrative. As a former sous chef at an upscale Chicago restaurant, Secich wanted to strike out on his own. He opened Charcuterie, an Amish-cured meat, smoked cheese, and baked goods store, which makes its products in the Amish style — i.e., without electricity or other modern conveniences. Though Charcuterie is popular, it’s struggling to stay afloat because of the compliance burdens that exist within Maine’s 160-page food safety code. Secich came under fire for his method of cooling meat (in ice boxes) and for his failure to have a HAACP (hazard analysis and critical control points plan). This treatment of Secich’s business is even more disturbing because other chefs may serve the very same meats that Secich sells without these regulatory burdens; in Maine, restaurants are subject to different rules than baked-goods stores like Charcuterie. “We’re thinking about closing because it’s just too much,” Secich said. “We want to stay open. But we’re so overwhelmed at the vast amount of paperwork…it’s so immense, I can’t keep up with it.”

Similar codes hamper food producers elsewhere. Ali Fratesi and Dustin Pinion created a unique business model raising chickens and pigs at Beaverdam Fresh Farms in Mississippi. They’ve established “buying clubs” with other small farmers to provide an easy way of getting fresh, local food to the community. But the Mississippi Department of Agriculture and Commerce shut that down, citing a regulation that prohibits them from selling their poultry in markets. This cut their sales almost by half. Under federal U.S. Department of Agriculture poultry standards, farmers can raise and slaughter up to 1,000 birds on their land and sell them in their state without mandatory inspections as long as they follow applicable safety guidelines. Farmers can also raise and slaughter up to 20,000 birds on their land and sell them in their state without mandatory inspections, if they have a state-certified on-site processing facility. But the Mississippi Department of Agriculture and Commerce has an additional regulation: it requires farmers to pay for an inspector to be present during the slaughter of meat before the meat can be sold outside the farm. That requirement makes the business model at Beaverdam Fresh Farms cost-prohibitive.

Meanwhile, like food producers, restaurants are heavily regulated to ensure compliance with stringent health and safety standards. But they must also keep abreast of unique regulatory mandates and restrictions.⁴² For example, the City of Seattle, Washington made headlines recently with enactment of an ordinance prohibiting straws. In a similar vein, California law punishes restaurants that gratuitously provide water to guests who don’t ask. California restaurant owners are also required by state law to pay assessments to a public corporation to fund advertisements promoting California tourism.

           c. Regulation of Manufacturers

Manufacturers must also comply with a wide array of regulatory requirements that have nothing to do with protecting consumer health and safety, but only promote the policy goals of some environmentalists. For example, California’s AB-32 regulates greenhouse gas emissions through a cap-and-trade system. Though advocates believe it is important for California to be a leader in combating climate change, the economic reality is that these regulations stifle productivity and raise the cost of consumer goods. Cap-and-trade is particularly problematic for smaller companies that cannot afford to retrofit their facilities with the latest technologies. These companies are forced either to cut back on production or to compete at auction for a limited supply of emission allowances — where larger corporations (with greater access to capital) have a tremendous competitive advantage.

Meanwhile, in an effort to force reduction in greenhouse gas emissions through the entire life-cycle of consumer products (from resource extraction to production, packaging, and retail), manufacturers are increasingly subject to green chemistry mandates dictating how products should be designed.⁴³ Any manufacturer producing consumer products that are ultimately sold in California is required to periodically submit reports to the State on the chemicals and processes used in production. “Other state green chemistry laws require submission of an ‘alternatives assessment’ [describing other options available for the manufacturer in producing a specific product].… Still others give states authority to compel companies to completely eliminate chemicals in their products…”⁴⁴

vi. Caught in a Bind: Real Life Stories of Crushing Regulation

These stories of budding entrepreneurs and their encounters with the regulatory thicket illustrate how individual regulations, even if individually justifiable, can combine to create a thicket that is prohibitively expensive to comply with and extraordinarily difficult to navigate.

Link: Wild Jimmy’s Sausage & Beef Jerky – Marco Island, Florida

Jimmy Downey got his start making sausage in his backyard — slowly perfecting his mix of parsley, parmesan cheese, and pork sausage. After hearing the refrain, “you should sell this stuff” enough times, he decided to try it. He took the first step towards entrepreneurship by selling beef jerky at a local farmer’s market. After he continually sold out of his stock, he decided to open a full-fledged business.

Little did he know the regulatory thicket that awaited him. Said Jimmy, “There are so many hoops to jump through. We had the FSIS (Food Safety and Inspection Service of the federal Department of Agriculture), the state department of agriculture, DBPR (Dept. of Business and Prof. Regulation), Hotels and Restaurants, the county, the city — every agency you can think of. It cost us $1,360 just for a hotdog cart inspection.” In total, Jimmy estimates that in addition to the thousands of dollars of regulatory fees he had to bear, he spent over 600 hours getting the necessary approval to operate his business.

Wild Jimmy’s is now a thriving company. His broad range of sausages include sweet or hot Italian, parsley and parmesan pork, mozzarella and broccoli rabe, Polish, bratwurst, Mexican chorizo, summer sausage, jalapeño and cheddar, Swedish potato, English bangers, and chicken and pancetta. He sells beef jerkies in almost the same number of flavors. Yet Jimmy swears that if, before he began, he had known about the sheer number of regulations he had to comply with, he “never would have done it at all.”

Link: Food shop owners vow to never open new locations in Austin

Katie Congdon, owner of Dan’s Hamburgers, has said that she will “Never[,] Never[,] Never[,]” build another restaurant in Austin so long as she lives. Dan’s Hamburgers was started by her parents in 1973, but Katie set out to rebuild the beloved store in 2014. In an open letter to Austin citizens and city officials, Katie described the process of renovating the building — and the bureaucratic nightmare that ensued.

Before she could even begin, it took the City nine months to grant her a site plan and the requisite building permits. Initially, Katie pursued the rebuild as a “remodel,” which makes the process easier but requires the business to keep more than half of its existing walls during construction. After she began demolition, Katie discovered that the remaining walls were unsound and would have to be rebuilt. But this also meant that her project would be considered “new construction,” with many attendant consequences. For example, Katie was now required to give up several parking spaces and replace them with “cars2go” spots. She had to add awnings above all of the windows to shade the sidewalk. She was forced to add in windows to the bathrooms, even if nonfunctional. She forfeited her drought-resistant trees in favor of new landscaping and irrigation — even though Katie believes she’ll never be able to use the irrigation given that the area is in a perpetual drought and subject to watering restrictions. New regulations also forced her to undergo inspections of her soda machines for potential CO₂ issues. Together, these regulations added months of extra construction time and an additional $100,000 in costs — not to mention the costs of keeping employees on the payroll during the delay.

After all was said and done, Katie said that “[n]ever again as a small business could we afford to remodel in the City of Austin.… There should be a better pathway for an existing small business in good standing to update a building.”

Link: Affordable housing projects strangled by regulation in San Francisco

San Francisco has some of the most expensive housing in the nation. Though entrepreneurs and builders stand ready, willing, and able to provide housing solutions that would shore up the housing deficit and bring down prices, regulators stand in their way. Patrick Kennedy, for example, has been trying to get pre-fabricated “tiny homes” approved in San Francisco — not only to address high prices, but also to aid the homeless.

But Patrick is up against a coalition of powerful unions that drive up labor and construction costs, entrenched developers who seek to remain the only builders in town, NIMBY (“Not-in-my-backyard”) residents, and the politicians funded by these various interests. After months of petitioning elected officials, Patrick was unable to make his dream of easy-to-build, easy-to-finance, easy-to-stack homes come to fruition. “San Francisco’s housing crisis is largely self-inflicted,” he said. “The regulatory thicket — lawsuits, hurdles, unions — makes it very difficult to produce here. You end up with very expensive projects, and you can then only justify them by selling high-end condos.”

Link: Former soldiers can’t provide security in Tennessee

Adam Jackson is a former Special Forces soldier who provided electronic security to U.S. embassies and military bases. Together with his former brother in arms, he founded a company that utilizes facial recognition technology to provide cutting-edge private security. Because his software can instantly identify people who appear on security cameras and match it with known offenders, his system could help defend some of the most vulnerable locales — including schools and domestic violence shelters. Yet he’s finding it impossible to operate in Tennessee, given regulations promulgated by the state’s Alarm Systems Contractors Board.

Under Tennessee law, Adam is required to obtain a license to install alarm systems. And in order to get a license, an alarm company must have a board-approved manager with a Bachelor’s degree in engineering and two years of experience in the alarm industry, or five years’ experience in the industry. Because he does not have a degree in engineering, Adam would have to apprentice for five years installing burglar alarms to qualify for a license.

But Adam’s business does not even install alarms. Instead, his software heightens the ability of other systems to identify threats. Nevertheless, because the Board determined that his innovative business operated in a “grey area,” it told him he had to get a license — and it refused to tell him whether his extensive military service meant he qualified for the license until he paid the fees.

Rather than complying, Adam moved his business out of state. “The Tennessee market is otherwise a dream market for us, but we had to leave,” said Adam. “Right now we’ve been forced to put our best products on hold.”

These anecdotes serve as cautionary tales of regulation run amok. But it is important to keep in mind that there are many more stories that we will never hear, because too many would-be entrepreneurs simply give up in the face of onerous regulation rather than making the effort to build a business in the first place.